Method and system for converting an annuity fund to a life insurance policy

ABSTRACT

A method and system for converting an annuity fund to a life insurance policy at a predetermined conversion date comprising the following steps: establishing an annuity fund including selecting an initial predetermined value and purchasing an annuity for the initial predetermined value, establishing an irrevocable life insurance conversion plan including selecting the predetermined conversion date, selecting a predetermined mortality death benefit at the predetermined conversion date and purchasing a guaranteed insurability option to guarantee the availability of the predetermined mortality death benefit at the predetermined conversion date, accruing investment income within the annuity fund on a tax deferred basis until the predetermined conversion date, converting the annuity fund to the life insurance policy with the predetermined mortality death benefit at the predetermined conversion date, accruing income within the life insurance policy until the death of the owner of the life insurance policy and disbursing the death benefit to the beneficiary at the death of the owner of the life insurance policy.

BACKGROUND OF THE INVENTION

1. Field of the Invention

A method and system for converting an annuity fund to a life insurancepolicy at a predetermined conversion date.

2. Description of the Prior Art

Annuities and life insurance are designed to meet different specificfinancial planning objectives. Since the Internal Revenue Code can havea significant impact on the realization of a person's particular goals,tax consideration of the tax consequences in the selection and purchaseof annuities and/or life insurance is often a compromise.

Investment income from the cash values inside the annuity appreciates ona tax deferred basis. Such annuities have no death benefit other thanthe return of the current account value. Thus, none of the premium forthe annuity is invested in current mortality costs. Except for any costsand fees, the entire annuity deposit is available to earn investmentincome.

Distributions of the investment income to the annuitant are taxed asordinary income. Upon death, the proceeds of the annuity are income inrespect of a decedent and taxed as ordinary income to the estate.

On the other hand, variable universal life insurance policies thatqualify under Section 7702 of the U.S. Internal Revenue code havesignificant tax benefits. In order to qualify within the IRC, not onlymust the investment meet the diversification requirements identical tothe diversification requirements for annuities, but the death benefit inrelationship to the premium deposit must first satisfy the GuidelineSingle Premium (GSP) requirement as statutorily mandated. Otherwise thepolicy will not qualify as a life insurance policy under Section 7702.The GSP defines maximum premium payable with respect to the initialdeath benefit. In addition, a cash value corridor that varies by age,between the face amount and the account value must be maintained at alltime.

The difference between the initial face amount, as determined by theGSP, and the initial account value is the amount of the mortalityinsurance established at the time of automatic conversion to the lifeinsurance policy. Since the cash value corridor decreases by age, therequired Face Amount in relationship to the account value decreases.Therefore the mortality element as required by Section 7702 decreases asthe age of the applicant increases.

To the extent the assets of the life policy are used to purchasemortality insurance, such assets are not available for investmentpurposes. The younger the person is that is proposed to be the insuredlife, the greater impact this concern will have on the decision topurchase the life policy.

Significantly, an owner of a life insurance policy can exchange thatpolicy for another life policy or for an annuity without an event ofrecognition under the U.S. tax laws as a Section 1035 exchange.Similarly, an owner of an annuity can exchange that annuity for anotherannuity without a tax consequence under Section 1035.

Unfortunately, the owner of an annuity cannot exchange for a lifeinsurance policy without an event of tax recognition under Section 1035.Instead, the annuity holder would be taxed at ordinary rates on thedifference between his tax basis in the annuity and the proceeds of theannuity.

Thus, there is need for a method or system that is an annuity at thetime of creation, but will convert automatically, and without furtherelection on the part of the owner, into a variable universal lifeinsurance policy at a specified date in the future.

At the time of the conversion from an annuity to a life policy, theamount of mortality insurance will be significantly less than if theproduct had been a life insurance policy from the outset. Further, thereis a build up of investment income with which to pay for the mortalitycharges.

The reason for the automatic conversion is to avoid the unfavorable taxtreatment associated with an exchange of an annuity for a life policy.

Various examples of financial planning methods are found in the priorart as exemplified by the following patent.

U.S. Pat. No. 6,064,969 describes an investment system including acomputer implemented annuity system generating annuity proposals forcustomers comprising a memory storing customer information input from acustomer and annuity information and a processor to retrieve thecustomer and annuity information from the memory and generate an annuityproposal responsive to the customer and annuity information. Accordingto the annuity system, the annuity proposal includes one of the fixedperiod installments, life, joint and survivor, joint and contingent andproceeds at interest annuities. The proceeds at interest annuity mayalso be viewed as a flexible certificate of deposit investment proposalfor use by companies providing banking services.

U.S. Pat. No. 4,750,121 teaches a pension benefits system for enrolledemployees comprising a trust institution and a life insurer institutionwhere the trust institution receives periodic payments, purchases andretains a life insurance policy from the life insurance institutioncovering each enrolled employee, invests in available securities,provides specific accurate future projections of periodic benefits,receives all life insurance policy proceeds upon the death of eachenrolled employee and distributes all periodic payable benefits.

U.S. Pat. No. 4,969,094 relates to a self-implementing pension benefitssystem for subscriber employees including a life insurer institution anda lending institution. The life insurer trust institution computes andreceives each subscriber employee's periodic payment primarily upon eachsubscriber employee's age and desired periodic benefits and issues alife insurance policy covering each subscriber employee providingspecific accurate future projections of periodic benefits forretirement, death or disability; and distributing all life insurancepolicy proceeds upon the death of each enrolled employee to the lendinginstitution.

U.S. Pat. No. 6,161,096 describes a method for a deferred awardinstrument plan by identifying at lease one participant in the deferredaward plan, retrieving financial data related to stock optionscorresponding to the identified participant, computing a spreadassociated with the retrieved stock options, establishing a trust withthe spread, determining whether a life insurance policy has beenpurchased by the participant, determining whether a split dollaragreement has been executed, monitoring and paying at least one premiumfor the life insurance policy and notifying the participant that apayment associated with the life insurance policy has been paid.

A study of the prior art illustrates the need for a flexible financialestate program or plan capable of maximizing return on capital thatminimizes the tax consequences and associated increased charges.

SUMMARY OF THE INVENTION

The present invention relates to a method and system to establish andadminister a plan convertible from an annuity phase and a life insurancephase. Specifically, the plan is designed to optimize the financialbenefits of an annuity plan and a life insurance policy with the leastor reduced tax consequences to the plan owner and beneficiaries.

The method and system provides a mechanism for managing the plan in theannuity phase and the insurance phase and to automatically convert theannuity plan to a life insurance policy qualified under Section 7702 ofthe U.S. Internal Revenue Code to satisfy the Guideline Single Premiumrequirement.

In particular, the method and system comprises establishing an annuityfund of a predetermined value, establishing an irrevocable lifeinsurance conversion plan, accruing investment income within the annuityfund on a tax deferred basis until the predetermined conversion date,converting the annuity fund to a qualified life insurance policy with apredetermined mortality death benefit at the predetermined conversiondate and finally disbursing the death benefit to beneficiary at thedeath of the owner of the qualified life insurance policy.

The irrevocable life insurance conversion plan includes selecting thepredetermined conversion date, selecting a predetermined initialmortality death benefit at the predetermined conversion date andpurchasing a guaranteed insurability option to guarantee theavailability of the predetermined mortality death benefit at thepredetermined conversion date.

Once the annuity fund is converted to the life insurance policy with thepredetermined mortality death benefit, income is accrued within the lifeinsurance policy until the death of the owner of the life insurancepolicy at which time the death benefit is disbursed to the beneficiary.The cost of insurance and guaranteed insurability is determined by theage, sex and health condition including smoking status of the planowner.

A processor comprising an input means, a storage means, a display meansand a processing means including a calculating means is employed tomodel or create and to administer the convertible plan.

To implement the method and system of the present invention, the ownerof the plan selects a plurality of plan parameters including the initialvalue or amount of the annuity fund, the value or amount of themortality death benefit and the date for converting from the annuityphase to the insurance phase. The cost of the guaranteed insurabilityoption is also ascertained.

The selectable plan parameters together with cost of the guaranteedinsurability option and annual or periodic plan management fee areentered into a data base within the storage means. Of course, the costof the guaranteed insurability option and periodic plan management feeas well as a table for the corridor required to meet the GuidelineSingle Premium requirement may be entered and maintained in storageindependent of entry and storage of the plurality of plan parameters.

Once the data and values are stored in or entered into the processor,the various values and amounts for the plan during the annuity phase andthe life insurance phase can be calculated and displayed either on a CRTor similar device or in printed form. With plan parameters, incrementalinvestment income, cost of the guaranteed insurability option andperiodic management fee, the calculating means is capable of calculatingor generating the beginning of year fund value, net amount at risk, costof insurance, either the cost of the guaranteed insurability optionduring annuity phase or the mortality death benefit cost during lifeinsurance phase, investment income, end of year fund value, corridordata or percentage and total death benefit. Thus, actual value andforecast value of the plan in either phase can be calculated anddisplayed.

The invention accordingly comprises the features of construction,combination of elements, and arrangement of parts that will beexemplified in the construction hereinafter set forth, and the scope ofthe invention will be indicated in the claims.

BRIEF DESCRIPTION OF THE DRAWINGS

For a fuller understanding of the nature and object of the invention,reference should be had to the following detailed description taken inconnection with the accompanying drawings in which:

FIG. 1 is a flow chart depicting the method and system of the instantinvention.

FIG. 2 depicts a model or example of the method and system of theinstant invention.

FIG. 3 shows a processor to implement the method and system of theinstant invention.

Similar reference characters refer to similar parts throughout theseveral views of the drawings.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT

The present invention relates to a method and system for converting anannuity fund to a life insurance policy at a predetermined conversiondate. The method and system provides a means to establish and administera plan convertible from an annuity to a life insurance upon theselection of a plurality of plan parameters by a prospective plan owner.The plurality of plan parameters includes the initial annuity funddeposit, plan issue age or date, conversion age or predeterminedconversion date initial death benefit amount and periodic or annual planmanagement fee. With this data or information and a projected return orperiodic incremental investment income the convertible plan can bemodeled for the duration of the plan including the annual beginning ofyear fund value, annual beginning of year net at risk amount, cost ofinsurance with the cost of the guaranteed insurability option during theannuity phase or the mortality death benefit during the life insurancephase, annual end of year fund value and annual year end death benefit.

In particular, the method and system provides a mechanism for managingthe plan in the annuity phase and the insurance phase and toautomatically convert the annuity plan to a life insurance policyqualified under Section 7702 of the U.S. Internal Revenue Code tosatisfy the Guideline Single Premium requirement.

In particular, the method and system comprises establishing an annuityfund of a predetermined value, establishing an irrevocable lifeinsurance conversion plan, accruing investment income within the annuityfund on a tax deferred basis until the predetermined conversion date,converting the annuity fund to a qualified life insurance policy with apredetermined mortality death benefit at the predetermined conversiondate and finally disbursing the death benefit to beneficiary at thedeath of the owner of the qualified life insurance policy.

The irrevocable life insurance conversion plan includes selecting thepredetermined conversion date, selecting a predetermined initialmortality death benefit at the predetermined conversion date andpurchasing a guaranteed insurability option to guarantee theavailability of the predetermined mortality death benefit at thepredetermined conversion date.

Once the annuity fund is converted to the life insurance policy with thepredetermined mortality death benefit, income is accrued within the lifeinsurance policy until the death of the owner of the life insurancepolicy at which time the death benefit is disbursed to the beneficiary.

As shown in FIG. 3, a processor generally indicated as 110 comprising aninput means or keyboard 112, a hard drive storage means 114, a displaymeans 116 and a processing means 118 including a calculating means andstorage is employed to model or create and to administer the convertibleplan. The processor 110 is coupled to a printer 120 by a cable 122.Further, the processor 110 may also be operably coupled to an externalor remote terminal by communications link 124.

To implement the method and system of the present invention, the ownerof the plan selects a plurality of plan parameters including the initialvalue or amount of the annuity fund, the value or amount of the initialmortality death benefit and the date for converting from the annuityphase to the insurance phase. The cost of the guaranteed insurabilityoption is also ascertained.

The selectable plan parameters together with cost of the guaranteedinsurability option and annual or periodic plan management fee areentered into a data base within the storage means. Of course, the costof the guaranteed insurability option and periodic plan management feeas well as a table for the corridor required to meet the GuidelineSingle Premium requirement may be entered and maintained in storeindependent of entry and storage of the plurality of plan parameters.

Once the data and values are stored in processor 110, the various valuesand amounts for the plan during the annuity phase and the life insurancephase can be calculated and displayed either on a CRT or similar deviceor in printed form, stored or transmitted. With plan parameters,incremental investment income, cost of the guaranteed insurabilityoption and periodic management fee, the calculating means is capable ofcalculating or generating the beginning of year fund value (BOYFV), netamount at risk (NAR), cost of insurance (COI), either the cost of theguaranteed insurability option during annuity phase or the mortalitydeath benefit cost during life insurance phase, investment income (II),end of year fund value (EOYFV), corridor data or percentage (CP) andtotal death benefit (TDB). Thus, actual value and forecast value of theplan in either phase can be calculated, stored and displayed.

The convertible plan model is best understood with reference to FIGS. 1and 2. Specifically, the prospective convertible plan owner selects orchooses the initial fund deposit or amount such as $1,000,000; issue agesuch as 60, conversion age such as 75 or date of conversion such as 15years from establishing the fund and the initial mortality death benefitat date of conversion from the annuity phase to the insurance phase suchas $3,500,018. This data is entered into the processing means 118through the keyboard 112 as shown in FIG. 3. Once entered, the computersystem generates the various periodic or annual variables of BOYFV, NAR,EOYFV and TDB by applying constants of the agreed upon annual managementfee (AMF) as a percentage of the annual beginning fund amount, the COIas determined by the issue age, conversion age and initial mortalitydeath benefit and corridor percentage or required by Section 7702 alongwith the projected investment income (PII) or actual investment income(AII). The actual investment income will be entered through the keyboard112. Except for the actual investment income, those values may reside inmemory for look-up once the variables are selected.

As shown, the initial beginning of year fund value (BOYFV) of $987,500is the initial deposit $1,000,000 less the annual management fee (AMF)which is for example of $12,500 or 1.25 percent of the initial deposit.Thereafter, the annual beginning of year fund value is the previousannual end of year fund value less the annual management fee. Forexample, at the beginning of the tenth year, the BOYFV for year 10 is$1,774,570. That is, the EOYFV for year 9 of $1,797,033 less $22,463 or1.25 percent (AMF) of the EOYFV for year 9.

The net amount at risk (NAR) during the annuity phase is calculated asthe difference between the total death benefit (TDB) at the date ofconversion or $3,500,018 and the end of year fund value (EOYFV) of$2,434,637 at date of conversion (year 14) or $1,065,381. The net amountat risk (NAR) during the insurance phase is calculated as the differencebetween the year end total death benefit (TDB) and the previous year endfund value (EOYFV). For example, the net amount at risk (NAR) for policyyear 20 is $356,393 or $3,500,018 total death benefit (TDB for policyyear 20) less $3,143,079 (EOYFV for year 19).

During the annuity phase, the cost of insurance is determined by theamount of selected initial death benefit, issue age of person andconversion age of person. For the example or model shown in FIG. 2, theCOI is $7,270 annually, which is deducted from the fund. The COI duringthe insurance phase which varies annually is determined by there-insurer's or insurer's rate maintained in look-up tables or databasein the processor 110 derived from predetermined actuarial statistics.

Projected investment income (PII) is calculated as an expected rate ofreturn (ROT) that may be a constant or a variable by changing the ROTthrough the keyboard 112. The actual investment income (AII) is inputinto the processor 110 as actual and historical data is available. Ineither the annuity phase or insurance phase, the EOYFV is calculated asthe BOYFV less the COI increased by PII or AII. For example, in policyyear 10, the BOYFV of $1,774,470 is reduced by the COI of $7,270 andincreased by the PII or AII of $141,384 for an EOYFV of $1,908,683. Aspreviously described, the EOYFV is used to calculate the next succeedingBOYFV.

The TDB during the annuity phase is equal to the actual value of thefund at the time of death. For example, in policy year 10, the TDB wouldbe between $1,774,570 (BOYFV) and $1,908,683 (EOYFV).

During the insurance phase, the TDB is equal to the CP of the BOYFV orthe selected initial death benefit which ever is greater. For example,in policy year 20, the product of the 105 percent (CP) and the BOYFV of$3,103,791 is $3,258,980 or less than the selected initial mortalitydeath benefit of $3,500,018. Therefore, the TDB is $3,500,018 for policyyear 20. On the other hand, in policy year 22, 105 percent (CP) of theBOYFV of $3,495,352 is $3,670,120 or greater than the selected initialmortality death benefit of $3,500,018. Therefore, the TDB is $3,670,120for policy year 22.

As described and illustrated, the values or amounts of the variousparameters can be calculated for any particular period and over the spanof the fund plan by the processor 110. So calculated, the values can bedisplayed on the display means 116, printed on the printer 120 and/ortransmitted over a communications link 124 to an external or remoteterminal.

It will thus be seen that the objects set forth above, among those madeapparent from the preceding description are efficiently attained andsince certain changes may be made in the above construction withoutdeparting from the scope of the invention, it is intended that allmatter contained in the above description or shown in the accompanyingdrawing shall be interpreted as illustrative and not in a limitingsense.

It is also to be understood that the following claims are intended tocover all of the generic and specific features of the invention hereindescribed, and all statements of the scope of the invention which, as amatter of language, might be said to fall therebetween.

Now that the invention has been described,

1. A method for converting an annuity fund to a life insurance policy ata predetermined conversion date comprising the steps of: establishing anannuity fund of a predetermined value; establishing an irrevocable lifeinsurance conversion plan, accruing investment income within the annuityfund on a tax deferred basis until the predetermined conversion date;converting the annuity fund to a qualified life insurance policy with apredetermined mortality death benefit at the predetermined conversiondate; and disbursing the death benefit to beneficiary at the death ofthe owner of the qualified life insurance policy, said irrevocable lifeinsurance conversion plan includes selecting the predeterminedconversion date, selecting a predetermined initial mortality deathbenefit at the predetermined conversion date and purchasing a guaranteedinsurability option to guarantee the availability of the predeterminedmortality death benefit at the predetermined conversion date wherebyonce the annuity fund is converted to the life insurance policy with thepredetermined mortality death benefit, income is accrued within the lifeinsurance policy until the death of the owner of the life insurancepolicy at which time the death benefit is disbursed to the beneficiary.